Chairman Clayton Says Companies Should Not be Required to Disclose Environmental and Social Matters

In a blow to several investor groups, SEC Chairman Jay Clayton recently said that he does not believe public companies should be required to disclose information concerning environmental, social, and governance (ESG) matters in a standardized format. He said each company has its own circumstances that may not fit within a standard framework.

In a blow to several investor groups, SEC Chairman Jay Clayton recently said that he does not believe public companies should be required to disclose information concerning environmental, social, and governance (ESG) matters in a standardized format.

Clayton was especially opposed to requiring publicly-listed companies to use ESG standards developed by organizations like the Sustainability Accounting Standards Board (SASB) and the Global Reporting Initiative (GRI), which some companies voluntarily use.

“Although third-party standards relating to ESG topics may allow for comparability across companies, that does not mean that issuers should be required to follow these frameworks in order to comply with SEC rules,” Clayton told the SEC’s Investor Advisory Group on December 13, 2018. “Each company, and each sector, has its own circumstances, which may or may not fit within a standard framework.”

His unenthusiastic views about requiring sustainability and ESG disclosures come as investors increasingly believe the information—such as the effect of a company’s operations on the environment or spending on political activities—is material to investing decisions and shareholder votes. Many large companies provide ESG disclosures voluntarily, but investor advocates say the information that is provided voluntarily is incomplete and inconsistently presented.

Fifty investor groups and 17 law schools in October 2018 petitioned the SEC to write a rule requiring public companies to disclosure ESG matters. “Such a framework would better inform investors, and would provide clarity to America’s public companies on providing relevant, auditable, and decision-useful information to investors,” they wrote in the petition.

In explaining his views on ESG reporting to the investor advisory panel, Clayton said it is important to remember two principles.

“First, in complying with our disclosure rules, companies should focus on providing material disclosure that a reasonable investor needs to make informed investment and voting decisions based on each company’s particular facts and circumstances,” Clayton said. “Second, investors—and here I’m thinking about asset managers who are required to vote in the best interest of their clients—should also focus on each company’s particular facts and circumstances. Here, I would like to underscore that investment advisers have a fiduciary duty to act in the best interest of their clients.”

Clayton’s views are likely to be welcomed by business groups who oppose efforts to add disclosure rules about social and environmental issues. They want the SEC to focus on providing material information to the average investor and not cater to what they call special interest groups. In their view, sustainability information is specialized data that is not relevant to most investors and has nothing to do with financial performance.

In the petition, however, investors said that recent investment analyses confirm that much of the ESG information companies provide is material.

They cited a June 2017 Bank of America Merrill Lynch study that found sustainability factors to be “strong indicators of future volatility, earnings risk, price declines, and bankruptcies.”

Moreover, they said a 2015 review of academic studies on ESG reporting found that companies that provide sustainability information tend to have lower costs for raising funds from investors and a higher stock price. Companies that provide investors with ESG information also tend to report higher earnings.

In the meantime, even as Clayton said that he does not believe ESG standards should be required, he emphasized that the standards still have value.

“They do, in some cases, in much the same way that appropriately presented non-GAAP financial measures and key performance indicators (KPIs) add value to the mix of information,” Clayton said.

Non-GAAP financial measures are not required, but many companies provide the information because investors say they are useful since the measures show how management sees its operations.